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Why hasn’t ‘sitting round the table and helping to make the rules’ helped UK exports?

The Single Market was primarily intended to improve the exports of members to each other and, in a polite WTO-compliant manner, to leave non-members at a disadvantage. Over the past 21 years it has not worked out that way. Members have sat around the table, and helped to make the rules, and some of them, including the UK, have paid substantial sums for doing so, but this has not given them any noticeable advantage in exporting their goods and services to each other.

The results presented in the previous chapters will be disconcerting, galling and puzzling to a lot of good minds and good people in Britain. Disconcerting because four successive prime ministers have repeatedly told them of the Single Market’s significant economic benefits for the UK, but never mentioned that non-members would enjoy greater benefits, and galling because these same good people have been obliged to pay substantial political and economic costs despite fewer benefits.

It will be puzzling because it flies in the face of received economic wisdom. For more than 40 years the EU has been engaged in removing barriers to trade in goods and services between its members. It surely follows therefore, as night follows day, that their exports to each other over these years must have increased more than those of non-members who continued to face the barriers that members have been removing on trade between each other. The data showing that this has not happened, and that non-members’ exports to members have increased faster than members’ exports to each other, seems to defy common sense. It is profoundly counter-intuitive and a paradox.

This chapter does not, alas, explain or resolve the paradox but merely offers a few comments on it, in the hope that they might prompt a response that is able to suggest how it might be done. Had the UK government, or the European Commission, committed resources to continuously monitor and analyse the impact of the EU and the Single Market on the UK economy, and identified and measured the multiplicity of factors that have affected the exports both of members and non-members within the Single Market, we might well be closer to answering the question.

A similar sighting after the euro

In 2006 two Swedish economists, Harry F Flam and Håkan Nordström, came across a somewhat similar paradox when examining the early impact of the euro on trade. Like membership of the EU and the Single Market programme, the euro was intended to increase trade amongst its own members, and its supporters warned the UK and other sceptical countries of dire consequences for their trade within the EU if they chose to remain outside it.

In the event, working with limited data from the first four years of the euro, 1999-2002, Flam and Nordström found that ‘contrary to our expectations, exports to the euro countries are increased to the same extent as exports from euro countries’.[1] They went on to describe this as a ‘spillover’ effect, and attributed it to increased vertical specialisation in manufacturing across national borders of eurozone and non-euro countries in Europe. In their view, producers outside the eurozone are ‘able to purchase cheaper inputs from the euro countries, which makes them more competitive and can increase their exports back to the euro countries’[2]. Unfortunately, they had no data to support this comforting hypothesis.

It does not seem likely that this ‘spillover’ hypothesis will help to explain the larger Single Market paradox of why exports of goods from non-member countries to the EU have grown more during the Single Market than those of its own members. Flam and Nordström were referring to supply chains with non-euro neighbours, rather than inter-continental ones at work over 20 years. In any case, the services exports of non-members have also grown as fast as those of members to each other.

Commission staff stumble upon the paradox in 2007

European Commission staff might be said to have stumbled upon the first signs of this paradox in 2007 when looking back at 2003 trade data. They did not want to make much of it, observing nonchalantly that,

…extra-EU exporters have also benefited from the suppression of intra-EU trade barriers and from the application of the principle of mutual recognition. In manufacturing since 1988 and until 2003 (latest available data) the share of extra EU suppliers… has gradually increased at the expense of domestic production.[3]

They affected no particular concern in this shift, and argued that,

…the slowdown of trade growth within the EU15 and euro-zone relative to trade growth with third partners is unsurprising given the already very intense trade flows within the EU15 and the large untapped opportunities for trade gains with third partners. [4]

It is a neat and happy solution to the puzzle: intra-EU trade has been so intense and successful that a slowdown is to be expected, leaving large untapped opportunities for non-members. Perhaps for members of the Commission this solution was persuasive, and even for some member countries. For the UK it is less so, since their trade or at least their exports to the EU have not been very intense, and their performance has remained inferior to that of a large number of disadvantaged non-members over many years. For UK observers at least, the paradox deserves more attention than European Commission staff cared to give it nine years ago, especially at this moment. If non-members benefit as much or more than members from the Single Market, they must now wonder why members pay the political and economic costs of belonging to it.

EU rules are a public good from which non-members benefit

There is one elementary contributory factor that deserves a mention in this context. Whatever else they may be, the rules of the Single Market are, in many respects, a public good. Those sitting round the table may intend to help only themselves but, irrespective of their intentions, by imposing uniform rules and standards on each other, they also necessarily help those who have taken no part in devising them. They allow exporters in non-member countries to comply with just one set of technical standards, and with only one set of administrative and customs procedures when exporting to members of the EU, instead of 28, thereby reducing their trade costs.

The rhetoric used to defend the Single Market often conveys a rather dated image of its rule-setting activity, much as if members were still engaged in setting tariffs, or something like tariffs, which would benefit members and leave non-members at more of a disadvantage with every new rule. The conclusion drawn from this rhetoric is that if the UK were to leave the EU, it would join the disadvantaged outsiders and therefore be obliged to negotiate re-entry to the Single Market at almost any price.

This is not the case. Non-members are, we now know, not at a disadvantage, and members are not sitting round the table devising tariff-equivalents with zero-sum consequences for members and non-members. They are more often imposing rules on each other, usually to create the Single Market’s level playing field, and thereby increasing their own trade costs, while leaving those of non-members unaffected. Once we recognize that these EU attempts to harmonize, standardize and create a level playing field among its members continually raise members’ trade costs, while leaving those of non-members unaffected, the success of non-members exporting to the EU begins to seem slightly less paradoxical, and the opportunity of being one of them considerably more attractive.

Making rules does not necessarily reduce trade costs

There is one piece of evidence presented by the Bank of England from 2008 that might appear to contradict this argument since it showed that ‘members of the EU face lower costs of trading with each other than non-EU economies face when trading with the EU’.[5] But lower costs are hardly surprising since this measure includes transport costs, as well as regulatory and legal costs. What we really would like to know are the variations over time in the relative trade costs of goods exports of member and non-members.

Whether members enjoy much of an advantage in services trade costs is also uncertain. A consultant’s report for the Commission in 2005 found no reason to distinguish between intra-EU and extra-EU firms because, among other things, ‘most of the barriers will be the same for foreign intra-EU firms and extra-EU firms…’, and whenever ‘a (foreign) firm is established in one Member State, it automatically becomes an intra-EU firm, and it will face exactly the same legal barriers as other EU firms. Coca Cola is in reality an intra-EU firm, because Coca Cola have subsidiaries in EU Member States.’[6] The very fact that members’ extra-EU service exports have grown faster than their intra-EU exports, and that non-members exports to them have grown faster than members, suggests that they may not be enjoying such a decisive cost advantage when trading within the Single Market.

All this uncertainty suggests that it is currently unsafe to assume that sitting at the table and helping to make the rules, and paying heftily for the privilege, yields any great advantage in trade costs of exporters, other than that a substantial part of them are paid by others back home.

Notes

[1] H. Flam and H. Nordström, ‘Trade Volume Effects of the Euro: Aggregate and Sector Estimates’, Institute for International Economic Studies, Stockholm University, Seminar Paper No. 746, June 2006, p.10. The size of the differences between euro and non-euro countries varies with the control group. When they use a larger control group of OECD countries instead of the three non-euro EU countries, the benefits of the new currency for trade between euro countries increased to 15 per cent while the trade from non-euro countries to the euro countries increased by 7.5 per cent.

[2] Ibid, p.19.

[3] F. Ilzkovitz, A. Dierx, V. Kovacs, and N. Sousa, ‘Steps towards a deeper economic integration: the Internal market in the 21st century’, Brussels, European Commission, 2007, p.48, Available from: http://ec.europa.eu/economy_finance/publications/publication784_en.pdf The diagram following the comment indicates that extra-EU imports’ share in apparent goods consumption in the EU increased from 9 per cent in 1986 to 15 per cent in 2003, while intra-EU imports’ share rose from 20 per cent to 24 per cent, and domestic consumption fell from 71 per cent to 62 per cent.

[4] Ibid, p.32.

[5] Bank of England, ‘EU membership and the Bank of England’, October 2015, p.87, Available from: http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf

The data is drawn from World Bank UNESCAP Trade Costs database. This survey did not of course include the trade costs of intra-EU exporters which are paid by EU taxpayers, consumers and non-exporters

[6] Copenhagen Economics, ‘Economic Assessment of the Barriers to the Internal Market in Services’, Final Report, January 2005, p. 60, Available from: http://ec.europa.eu/internal_market/services/docs/services-dir/studies/2005-01-cph-study_en.pdf


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